HELOC VS Cash Out Refinance
Member since 2017 · 1 post · 1 vote
I am new to the real estate investing field and am seeking advise between choosing a HELOC/Cash Out refinance loan for funding.
My primary home is paid off and valued at approximately 600k. I am looking to get a loan for funding to cover the 20% and closing costs of a rental property that I am in the market for. My budget on the rental property is 350k.
Any advise on choosing between a HELOC/Cash out refinance?
Marco,
Cash out refinance is the way to go especially now that rates have dropped significantly. Heloc's can be a obstacle when investors go to buy more properties. They are an open end liability and a debt burden when it comes to buying more REI. Heloc rates right now are typically higher than a 30 year mortgage. Heloc are also usually set up on a shorter term like a 15 or 20 year versus a 30 year mortgage.
Mortgage will have No prepay and some Helocs carry a 1, 2, 3 year prepayment penalty. You also get to be cash fluid which helps with having liquid reserves required by the banks/lenders. The cash can always be used as an asset in underwriting for PITI reserves. A Heloc can never be used as an asset or PITI reserves.
Congratulations on owning your primary home outright and considering real estate investment as your next venture! You have three main financing options to consider: a Home Equity Line of Credit (HELOC), a Home Equity Loan (HELoan), and a cash-out refinance. Each option has its unique features, benefits, and considerations:
Home Equity Line of Credit (HELOC)
• Flexibility: Offers a revolving line of credit, allowing you to draw funds as needed.
• Variable Interest Rates: Typically comes with a variable rate, which may start lower but can fluctuate over time.
• Interest-Only Payments: During the draw period, you may have the option to make interest-only payments.
• Best For: Investors seeking flexible access to funds over time for varying costs.
Home Equity Loan (HELoan)
• Lump Sum: Provides a one-time lump sum of cash, ideal for covering specific, immediate costs.
• Fixed Interest Rates: Features a fixed interest rate, offering stable, predictable monthly payments.
• Set Repayment Term: Comes with a defined repayment period, usually shorter than a mortgage, leading to quicker payoff but potentially higher monthly payments.
• Best For: Investors who need a specific amount upfront and prefer payment stability.
Cash-Out Refinance
• Refinancing: Involves refinancing your entire mortgage at a potentially different interest rate and taking out the difference in cash.
• Fixed or Variable Rates: Can choose between fixed or variable rates, depending on the loan type.
• Potential for Longer Term: May extend your mortgage term back to 30 years, lowering your monthly payments but increasing the total interest paid over time.
• Best For: Investors looking to potentially secure a lower mortgage rate while accessing equity in a lump sum.
Key Considerations
• Interest Deductibility: Interest is generally tax-deductible when used for buying, building, or substantially improving a rental property, for all three options.
• Closing Costs and Fees: Vary by option, with HELOCs generally having the lowest and cash-out refinances the highest.
• Repayment Strategy: Consider how the repayment terms align with your financial goals and cash flow needs.
• Market Conditions: Current interest rates will affect your decision, especially if refinancing could lower your overall mortgage rate.
The right choice depends on your specific financial situation, investment strategy, and goals. A HELOC offers flexibility and variable payments, a HELoan provides stability with fixed payments and a lump sum, and a cash-out refinance could lower your mortgage rate while accessing equity. Consulting with a financial advisor or mortgage broker can help you weigh these options in the context of your overall investment plan, considering the current market conditions and your long-term financial objectives.